Don't Build a House of Cards
By Keith Bunn Jr.
November 25, 2012
The only reason I'm posting this is to give you an example of what NOT to do!!! The guy who wrote this posting, Kevin McKee did this and thought that it was a good plan, but his plan only works if nothing goes wrong. In a sense, he is not factoring in risk. From everything I've read, he has taken on a whole bunch of risk!! As he put it in his posting,"There are No Absolutes in Personal Finance". We don't know what will happen! So let's go over what he did a bit at a time.
He said that he... "had to sell essentially all of my stocks, drain my Roth IRA, and even take a loan against my 401k to get the money for the down payment, but after doing all of that, I now have enough money for closing." But he even admits, "I actually don’t even know exactly how much I’ll need at closing because all the paperwork and stuff isn't done." So how does he have enough money for his closing & what if after all that he's still short for the closing?
Putting all that off to the side for now, I have no problem with him selling off his stocks to put towards the down payment to the house he wants to buy, but cashing in his Roth IRA & taking a loan out of his 401K is a whole other matter. Just those two things tells me that he is trying to buy a house that he can't afford. Not because he is taking out a mortgage to get it but because he has liquidated and taken out loans from his retirement accounts just for the down payment. The Roth IRA for example, because a Roth grows tax free, he didn't have to pay taxes when he cashed it out, but he did have to pay a penalty for withdrawing it out early. But what makes me dislike this part of the plan the most is that most of the money in his investment was growth. For example: if you take $2000 and invest it at 10% rate of return for 20 years, that would be $14,656.19. $12,656.19 of that was interest and that was all tax free. Now I don't know and he didn't say how much he had in that account, but he missed out on a bunch of money.
The 401K loan is a horse of a different color. When you take out a 401K loan, you are taking a loan out of a tax-deferred retirement plan and you pay yourself back, sometimes with interest. But if you take out a loan from this account and you leave your job, that loan comes due right then and there and if you don't pay it back within 60 days, not only will you have to pay back the money you borrowed but you'll have to pay taxes and penalties of anywhere between 34-47%. So my question to you is, how many stories have you heard lately of people losing their jobs? No job is secure, please remember that before you take out these kinds of loans. Here is a link to backup what I've told you.
On top of all this risk, he add a possible balance of $2000 on his credit card for the purchase of his fiancee’s engagement ring. All it takes for this young man's brilliant plan to go from good to nightmare is the loss of his job. When that happens his 401K loan becomes due, and even though him and his new bride could last for a little while on his savings, it probably won't last long now that he has a huge tax bill on his hands. On top of that, he probably won't be able to pay on his new mortgage. As for his credit card, he probably won't be able to pay it off every month like he says he does, in fact, they will probably live off them to make up the loss income. This is the type of stuff we hear about all the time. It's not too far fetched to think this could happen. All it will take to knock over his perfect house of cards is one bad event. With this amount of risk he set himself up with, all he has to do is trip and he'll be in a world of hurt.
I hope my posts inspire you to look at what you’re doing financially and if needed, make some changes that will cause you to win financially. I also look forward to reading your views on any articles or postings that I may post. For more money news, facts and ideas, follow me on Facebook, or Twitter. Thank you!